a
Time line | 0 | 1 | 2 | 3 | |||
Cost of new machine | -174000 | ||||||
Initial working capital | -6500 | ||||||
=b. Initial Investment outlay | -180500 | ||||||
3 years MACR rate | 33.33% | 44.45% | 14.81% | 7.41% | |||
Profits | 51000 | 51000 | 51000 | ||||
-Depreciation | =Cost of machine*MACR% | -57994.2 | -77343 | -25769.4 | 12893.4 | =Salvage Value | |
=Pretax cash flows | -6994.2 | -26343 | 25230.6 | ||||
-taxes | =(Pretax cash flows)*(1-tax) | -5245.65 | -19757.25 | 18922.95 | |||
+Depreciation | 57994.2 | 77343 | 25769.4 | ||||
=after tax operating cash flow | 52748.55 | 57585.75 | 44692.35 | ||||
reversal of working capital | 6500 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 52500 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 3223.35 | |||||
=Terminal year after tax cash flows | 62223.35 | ||||||
c. Total Cash flow for the period | -180500 | 52748.55 | 57585.75 | 106915.7 | |||
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.12 | 1.2544 | 1.404928 | ||
Discounted CF= | Cashflow/discount factor | -180500 | 47096.91964 | 45907.00733 | 76100.48344 | ||
NPV= | Sum of discounted CF= | -11395.59 |
d
Reject project as NPV is negative
7. Problem 12.09 (New Project Analysis) eBook You must evaluate a proposal to buy a new...
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